Political stability essential for Africa to unlock its full economic potential

While Kenya inaugurates a pilot project of transport of flowers by rail via reefer container from Naivasha to the Mombasa port for export to The Netherlands, in Ethiopia international flower companies flee the country because of the worsening political instability. Semafor Africa reports that the north-western Amhara region, a key flower-growing hub, has suffered a major blow with regard to one of the country’s main exports: fresh-cut flowers. To take advantage of this situation there are the neighboring Kenya and Uganda, where the companies are relocating. After five Dutch companies (Tal Flower Farms, Tana Flora, Abyssinia Flowers, Dutch Flower Group and Alpha Flora) left the country, it is now the turn of Selecta One, a German company, which is planning to quit the country, leaving more than 1,000 local personnel unemployed.

Cut-flower industry is a key sector in the Ethiopian economy, the country’s second-biggest export after coffee and one of the top foreign exchange earners. The industry generated more than $500 million in revenues in 2024, with a global market share of a 5.5%, behind Kenya (16%), which is the lead exporter in Africa of rose cut flowers to the main developed economies, such as the European Union (EU) where the market share reaches 38%.

In May 2021 we published on our blog a post where we highlighted that political instability can be a serious challenge to the industrialization of Africa, which is the foundation of the African Continental Free Trade Area (AfCFTA) project. Like Ethiopia, many other African countries suffer from this disease. Investors do not invest in politically unstable countries: they seek predictability. And even when they invest, they are quick to move to other countries if instability occurs and they find a better alternative.

Many of companies that invested in the flower industry in Ethiopia are reporting increasing security problems, with frequent hijackings of staff truck drivers in exchange of a ransom. This situation is also deterring tourism, another important source of revenue for the Ethiopian government. Moreover, Semafor reports that the government is having challenges in attracting foreign investors in its telecommunication, construction, and real-estate sectors as well, despite having adopted laws allowing foreign players to operate more profitably within the country. This is not only happenning in Ethiopia. Even more developed markets in Africa suffer from these challenges, like South Africa, where in the first 3 months of 2023 more than 2,300 highjackings were reported, but this is due to the high rates of criminality in the country, rather than to political instability.

Yet, Ethiopia still has the potential to attract foreign investors. The recent liberalization of exchange rates, which has made it easier to repatriate profits, increases Ethiopia’s attractiveness for foreign investors. Furthermore, the country low labor and electricity costs (compared to other African countries), is a major incentive for foreign companies wishing to locate in Ethiopia.

But is this sufficient? Probably not. Political instability (as well as high rates of criminality) create a climate of uncertainty that undermines the conditions necessary for attraction of both international and local investment. Investors, especially multinational companies, are particularly sensitive to the political risk and are generally reluctant to bring capital into economies that do not offer a stable political environment or where they perceive that risks may be higher than returns. They prioritize the safety of their investments, and seek assurances that their contracts will be honored and that property rights will be protected. If these conditions are not guaranteed, the conditions for industrialization and employment do not materialize. This is also the reason why Public-Private Partnerships (PPPs) struggle to gain traction in many African countries (Africa accounts only for 7% of global PPP investments). The perceived risk of investing in a country where the political situation can change suddenly are particularly high, and it acts as a barrier to these kind of contracts. In fact, PPPs typically involve long-term contracts (often spanning decades), while investors need assurance that the political and regulatory environment will remain stable throughout the project's lifecycle.

Creating a stable political environment is therefore not only desirable, but essential for Africa to unlock its full economic potential and attract the investments needed for sustainable development. And in this area, Africa still has a long way to go.